We put a lot of focus on the Las Vegas real estate market. After all, we sell large amounts of real estate here. Our view cannot be too myopic however, so observations of global trends are necessary. For the past couple of years I've been looking at China real estate. Its difficult to grasp the magnitude of China's deals because a lot goes un-reported. But I recall seeing cranes everywhere in Beijing and Shanghai. Sure, demographics push a lot of this and a growing consumer base is the genesis of demand for these housing units. Nevertheless, rapidly increasing prices does generate a type of euphoria and prices de-link from what we believe are fundamentals.

This bubble appears to be occurring in China and has for some time. Two years ago I was talking to real estate investors in China who noted that their interest in U.S assets was weak because our market was deflating and "theirs just keeps going up." But a lot of Americans have been down this road with two bubbles in close proximity, the tech bubble and the housing bubble. From my empirics, I see many of the U.S real estate markets as an anti-bubble, where we have offloaded all the gains of the bubble...and then some. The notion that I derive from these factors is that it is more reasonable to buy assets in these depressed markets rather than the euphoric ones. As the possible China bubble is becoming more newsworthy, perhaps greater monies will find themselves in these beaten down markets that have long-term positive possibilities.

More on what is happening in China.

While "flipping" of homes in China does occur, Patrick Chovanec, writing in Seeking Alpha, notes that there are also long-term holds or stockpiling happening (not even renting the homes). The perception is that it is similar to a "store of value" like gold. Why not just buy precious metals then? I think it may be that leverage is available for real estate deals. We've been down that road before.

In the U.S

Some individuals in the U.S are worried about inflation. The numbers really don't show it however and components of CPI, like housing, have been falling in price. Lower airline fares, lower new car prices and declines in some household furnishings also contributed to weak inflation results in the CPI. Listening to an interview on Bloomberg the other day, and I cannot recall the individual, stated that he did not believe the government numbers. He stated the famous phrase from the Jacobellis v. Ohio case but with a twist. "Inflation is like pornography, you know it when you see it." Eat at any restaurant or buy commonly used services and ask yourself if you thought prices declined. Not to mention trash pickup, auto registration and other municipal or state services and other things you are compelled to buy per the law.

Inflation is a difficult concept to grasp though. In and of themselves these items increasing in price doesn’t necessarily mean inflation but are the result of supply and demand. In Milton Friedman’s view, excess money creation generates inflation. The Fed's quantitatively easing hasn’t yet yielded measurable inflation. There just isn’t enough velocity of money. Even congress, who manage money worse than wino’s, haven’t pushed out aggregate demand. But doesn’t it feel like your purchasing power has weakened? I am convinced that Reese’s peanut butter cups are smaller than they used to be. Fun size Snickers used to be at least two inches, now they are smaller. Stuff that used to be in a twelve ounce bag is now 11.5 oz but at the same price. I don’t think we are as deflationary as the CPI shows and there appears to be creeping price increases.

The point is, inflation can come out of nowhere and fast. Real estate may end up proving to be a nice store of value in the downtrodden but upside laden U.S markets but looks a little scary in China. We do see some hedging occurring as well. In the near-term, its unlikely that Bernanke, a student of the great depression, along with the Fed, will increase rates very soon as one of the reasons for the great depression has been noted as the Fed tightening too much. Nevertheless, If the velocity of money ever does pick up, than we are likely to see inflation again. When this time comes, who knows, but I have a feeling general people will know it and start hedging before the indicators show it.